The past few years have witnessed an explosive growth in small independent breweries. By 2012, the number of small independent breweries operating in the U.S. surpassed pre-prohibition numbers. New breweries now open on an almost daily basis, all offering many unique types of beers. According to the Brewers Association, in 2013, 304 breweries opened while only 20 closed. This is a failure rate of 6.6%, which is better than several of the most profitable franchise eateries.
Despite this widespread growth, sales for independent breweries are still relatively weak in comparison to large commercial breweries, such as Anheuser Busch® and Miller Coors®. Independent brewery craft beer sales were about 7.8% of all the beer sales in the U.S. in 2013. Small independent breweries run low profit margins, which inhibits their ability to grow and reach beyond their local markets.
One of the largest obstacles preventing small independent breweries from growing faster is the three-tier alcoholic beverage distribution system.
The three-tier alcoholic beverage distribution system was established in the United States following the repeal of Prohibition. The three-tier alcoholic beverage distribution can vary significantly from State to State.
The three-tiers of this system are retail (alcoholic beverage producers), distribution (wholesale distributors), and retail (consumer retailers). Within this system producers, which include brewers, wine makers, distillers and importers, can only sell their alcoholic beverages to wholesale distributors. They cannot sell to retailers, or directly to the public. Wholesale distributors can sell to retailers, but not to the public. Retailers may sell to general consumers.
The inventories, distribution, and ordering of alcoholic beverages must be tightly managed as these beverages are perishable or have peak taste expiration dates.
The justification for the three-tier alcoholic beverage distribution system is to regulate and control the alcohol industry lest it return to the excesses and abuses that led to Prohibition. The three-tier alcoholic beverage distribution system prevents any private, single ownership of all three tiers, production, distribution, and retail. The three-tier alcoholic beverage distribution system also provides the States with methods to easily levy and collect taxes on alcohol producers.
The three-tier alcoholic beverage distribution results in higher prices for consumers, lower profits for producers, and uneven distribution of alcoholic beverages. Each tier of the system must produce a profit, so the consumer must pay for the profit of the producer, wholesale distributor, and the retailer.
Many wholesale distributors have been swamped with the high volumes of new breweries, making it more difficult for small independent breweries to distribute their product. Wholesale distributors, who usually operate with small numbers in a large territory, simply cannot handle the numbers of SKUs and product complexity. Many retailers cannot offer their limited shelf space to new products. In such a competitive market, independent breweries will operate at low margins to attract distributors' retailers with limited retail space to their products with larger profit margins. These low margins prevent small independent breweries from growing and expanding their products.
A further obstacle to small independent breweries in this system is the ownership of several large wholesale distributors by large commercial breweries. These distributors will move their products first to retailers, even if to occupy retail shelf space to deny it to small independent breweries.
Thus, there is a need for a new system that allows small independent brewers to more efficiently attract wholesale distributors and retailers to their products as while also allowing these small manufacturers the ability to take advantage of states that allow self distribution.